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The Arab Spring Needs Economic Freedom

For most Egyptians, the revolution that overthrew Hosni Mubarak
was driven as much by poverty and lack of economic opportunity as
it was by anger over unaccountable and authoritarian government.
Unfortunately, the country’s newly elected government under
President Mohamed Morsi failed to tackle wasteful spending, over
regulation, or the omnipresent grabbing hand of the government. In
the months leading up to the recent military coup, the country had
its lowest growth rates in two decades, rising unemployment, and a
soaring budget deficit.

Strangely enough, among politicians and Middle East experts,
economic issues seem to be on the back burner, overshadowed by
concerns about the region’s political future. In Cairo and in
Washington, most of the attention is devoted to the arcane power
struggles, loyalties, and ideologies animating Arab political life.
Maybe it is time to accept that it will probably take years until
standard, Western-style democratic institutions emerge in Arab
countries. In the meantime, however, radical economic reforms could
go a long way in improving the lives of ordinary Arabs — and
laying the groundwork for political stability.

The Middle East won’t
have democracy soon, but economic liberalization can
help.

After sub-Saharan Africa, the Middle East is the most rapidly
growing region in the world. Although fertility rates are now
falling, the number of young people entering the labor markets in
Arab countries is rising rapidly and will continue to grow for at
least another decade. Unless they’re able to find jobs, start
businesses, and provide for their families, the Middle East will
have to brace for a prolonged period of unrest.

Youth unemployment throughout the region consistently tops 20
percent — and many more young people are outside of the labor
force, not captured by unemployment statistics. In the region,
contrary to conventional wisdom, education often makes the problem
worse. In Morocco, for example, those with the highest level of
educational achievement face an unemployment rate of 19.4 percent,
compared with only 4 percent for individuals with no degrees.

The lack of economic freedom is the single most important factor
limiting job creation and economic growth in the region. According
to the World Bank, to register a claim on a piece of real estate in
Algeria it takes ten procedures, 63 days, and 7.1 percent of the
value of the property. It takes 29 payments and 451 hours to
prepare, file, and pay Algerian corporate income tax — which
imposes an average effective rate of 72 percent on corporate
profits. In Egypt, the situation is better, but not by much:
Entrepreneurs end up paying 42.6 percent of their total profits to
the government, after making 29 tax payments each year and spending
392 hours preparing, filing, and paying them.

In the past two years, despite the area’s political
revolutions, Arab governments have done little to liberate their
citizens economically. If anything, the situation has been made
worse in some places by new populist demands on governments, which
have fueled unsustainable growth in spending on subsidies and
public-sector jobs. As a result, for instance, Egypt’s fiscal
deficit for 2013 is currently running at 15 percent of GDP, and its
public debt is well above 80 percent of GDP.

Egypt’s fiscal problems are largely driven by the cost of
subsidies for various consumer goods, ranging from bread and tea to
gasoline, diesel oil, and liquefied petroleum gas, which is used
for cooking. One-third of the government’s budget is spent on
subsidies, which disproportionately benefit large companies and the
wealthier segments of the population, which tend to purchase more
of the subsidized commodities. The government’s subsidies for
commodities Egypt has to import help explain the rapid outflow of
the country’s foreign-exchange reserves, which currently sit
at $14.9 billion, less than half of their level in January
2011.

The Middle East is reaching a point at which economic reforms
are becoming unavoidable. Regardless of political ideology, the
region’s governments need bold reformers who can rein in
public spending, open up their economies to competition, and remove
the most egregious obstacles to economic activity. In some cases,
such as Egypt’s, this means a simple return to the economic
liberalization and privatization that had been gradually occurring
in the years before the Arab Spring and has sadly stalled in its
aftermath.

The 18th-century British landscape architect Lancelot
“Capability” Brown was famous for designing gardens
around English country houses. Instead of laying a direct path to
the house, his designs would make visitors take long, winding paths
throughout the gardens before arriving at the destination — a
way he considered superior to alternative forms of landscaping.
Similarly, shifting the focus away from building democratic
institutions now to creating space for economic
opportunity does not mean giving up on democratic governance in the
Arab world. It simply means recognizing that, in order to become
stable democracies, Arab nations will have to take a roundabout
route — one that involves expanding economic freedom and
prosperity to all.